Perhaps the most important analytical process of marketing is segmentation. By segmenting the market, one obtains a very clear understanding of customers; and segmentation ultimately provides a basis for clear and precise targeting and positioning.

But segmenting is also very difficult—and, especially without customer data, it is, I would admit, an art form in marketing.

You can become quite confused about segmentation if you read the popular press or most marketing textbooks, or look at countless Internet companies... because the term has been used to signify many things.

Typically, you'll find the term segmentation applied to demographics and lifestyles in consumer markets, and to size, industry and geography in business markets. On the Internet, people use age, gender, etc. for segmentation (or, worse yet, confuse segmentation with terms like one-to-one marketing—as though people are so unique that they have little in common).

It's all very confusing, but there is a way to make things clearer. The answer lies in the work of Russell Haley (Journal of Marketing, July 1968), who first used the term "benefit segmentation."

Also known as "Needs-Based segmentation," benefit segmentation is essentially the idea that customers should be segmented on the basis of their needs. Simply put, customers in different benefit segments have different needs.

Previously, we have explained benefits and tradeoffs, so you can use these terms to crystallize the idea of segments having different needs. The different segments allocate their 100 points differently across the various benefits. This allocation results in the needs of different segments clustering around different benefits.

Here is Haley's original segmentation of the toothpaste market. Notice how the segments seek a different cluster of benefits. Again, the segments trade off the possible benefits differently.

You could easily imagine that the market for consumers buying on the Internet is similarly broken up into four or five segments with names like "Music Aficionados," "One-Stop Shoppers," "Techno-Media Types," etc. In fact, recent studies have shown that Internet users break into six categories, including "E-bivalent Newbies," "Clicks and Mortar," etc.

Two key ideas to note from this chart:

• First, the labels given to each segment are arbitrary. They are called the segmentation bases and are simply used to label a group of customers who care about a different cluster of benefits.
  
  
• Second, along the left column you will also see segment descriptors, or things that describe the customers in each segment. These descriptors may correlate with the basis of the segmentation (and if a descriptor is very highly correlated, it could be used as a basis for segmentation). In the above example, we can see that maybe lifestyle is highly correlated with the segmentation basis, so this could also serve as a good label for the segments.

Before getting into how one can think about the various ways to practically segment a market, let's first consider some key issues and questions:

Why should you segment by benefits, rather than the descriptors? There are three ways to answer this:

1. It's the only way to have a clear message in the market.
   
   
2. It's the only way to deliver what the customer wants.
   
   
3. Marketing academics have not been successful at segmenting the markets differently and still finding meaningfully different segments.

Does this mean that descriptors are not used in marketing? No, they absolutely are used, but for a different purpose.

To see this, consider the following very simple example and how benefits are powerful and descriptors are useful. We have two fictitious segments in the cereal market and two demographics (young and old) and a product line (in colored bold) for each segment. Notice how clean this is in terms of a message (i.e., the benefits) for each segment. Note also how the descriptors are useful for the specific products names.

Now, instead think about segmenting this market based on age (a typical way people might segment this market). What you would have is this: